It’s nearly time for the peonies to bloom in China. But not for Oleg Deripaska’s plantings, at least not this season.

According to sources at Deripaska’s electricity company, Eurosibenergo, the Chinese government has so far refused to approve the investment of state-controlled funds by China Yangtze Power Company (CYPC) in Eurosibenergo, and thereby guarantee its initial public share offering (IPO) on the Hong Kong Stock Exchange. Accordingly, the Eurosibenergo is off for the second time in four months.
But Deripaska isn’t giving up on his Chinese courtship. Eurosibenergo has simply announced that it is postponing its share sale for another six months. But will Bejing love him better when Deripaska is six months older, and the Eurosibenergo share sale dead and buried? To answer that, we must re-read the classics.

“The Peony Pavilion” is one of the most famous of theatre works from the Ming Dynasty, and was first performed in 1598. The plot concerns an adolescent daughter — made important because she is the daughter of an important official — who falls in love while in a garden, asleep and dreaming. The lover doesn’t appear in the flesh, and the girl can’t be rescued from her lovesickness, so she dies. The beau, a scholar by profession, starts dreaming of the girl himself; digs up her corpse; resurrects her; and is pardoned for his combination crime of grave and cradle robbing by the emperor. So everyone is happy at the end.

(Shakespeare’s comparable Romeo and Juliet, first published one year earlier, ends badly for the lovers who, having taken poison, stay put in the grave. “For never was a story of more woe”, etc.)

Eurosibenergo’s woe has been reported in detail here last November. Not even the lovesick Bloomberg agency could persuade the Chinese markets in Hong Kong and Shanghai that the Siberian electricity producer, on which the already listed Rusal depends for its low-cost power and aluminium price advantage, could be profitable independently. A memorandum of understanding between Eurosibenergo and CYPC, signed on October 11, declared that the two utilities would “explore joint development opportunities for power projects in Russia, potentially including the upgrading of the EuroSibEnergo’s power assets and the construction of new hydro power plants in Russia, with the specific focus on Siberia. These projects aim to feed the growing domestic demand for electricity which is anticipated in the region and to create additional [capacity] for power exports from Siberia to the north and northeastern regions of China in accordance with the Russia – China Intergovernmental Agreement on power exports signed in 2006. The parties also agreed to make coordinated efforts to obtain support from their regulatory bodies and electricity grid companies in Russia and China. The Agreement, which is preliminary, subject to a definitive binding agreement, also covers cooperation in the exchange of technology and management information.”

A month later, Eurosibenergo found that Chinese share buyers were valuing its assets at less then $3.5 billion, after it had claimed they were worth $8 billion, so the IPO was abandoned before it started. CYPC, the Chinese company, claimed, in a Bloomberg handout dated November 30, that it “is in talks to buy a stake in OAO Eurosibenergo as a key investor for the Russian utility’s planned initial share sale in Hong Kong, said three people familiar with the matter. The investment requires approval from the Chinese government, the people said, declining to be identified as the talks are private. EuroSibEnergo has delayed its offering until 2011 because of the discussions, according to the people. The companies are still negotiating on the price, one of them said.”

In a following Bloomberg advertisement, this one dated January 21, Eurosibenergo said it would launch its Hong Kong share sale “in the first quarter, according to two people familiar with the matter. “And so it might have, if CYPC had delivered on the promise of approval from the Forbidden City. If to count the number of Bloomberg sources familiar with the matter, this claim must have been one-third less credible.

And so it has proved to be. Last week, in a Russian news agency despatch dated March 29, Eurosibenergo’s chief executive Andrei Likhachev said the IPO would not take place until the September-November time period. The necessary preparations for the share sale had been made last year, he added; but he did not say why the first-quarter deadline had been missed. Asked for the reason, Eurosibenergo’s spokesman Andrei Petrushinin replied: “Unfortunately we can’t comment on issues relating to EuroSibEnergo’s IPO. As far as cooperation with the Yangtze Power is concerned, the company has received all necessary approvals by Chinese authorities for the beginning of the strategic cooperation with EuroSibEnergo, and it is actively developing. Now we are working together on construction projects in Eastern Siberia, one thermal and two hydro-power plants with total capacity of 3 GW. We expect to produce a bank feasibility study for these projects by the end of the year.”

This implied that all that has been agreed between Eurosibenergo and the Chinese is a bank feasibility study on possible construction projects — no agreement by CYPC to invest in Eurosibenergo shares.

A Eurosibenergo insider adds that in fact, CYPC had been asked to participate in the IPO last November, but permission had been refused by Beijing. The source claims this ban has now been lifted. But it appears there are Chinese conditions which may be as good as a veto on the IPO investment, if more politely expressed. According to the source, the Chinese autrhorization came earlier this year. But by then Chinese stock market conditions had deteriorated in both Shanghai and Hong Kong, adding to the downward pressure on Eurosibenergo’s valuation, and increasing the reluctance of Chinese investors to buy. CYPC was told by Beijing not to lose its proposed $168 million share purchase, no matter how big a bloc of Eurosibenergo shares the money could purchase as the Russian company’s valuation continued to dwindle. That appears to have been Beijing’s first condition.

The second appears to require Eurosibenergo to reorganize its relationships with its subsidiaries and associated companies, and establish a broader base for operations, revenues, and profits – broader, that is, than its dependence on selling electricity to Rusal. This is now being planned to take the form of a share swap with RusHydro, the state hydro-electric power holding, and Inter RAO, the state controlled electricity supplier and exporter. Until that happens, however, the IPO will have to wait.

An elegant Chinese conclusion, to be sure — but not exactly the happy resurrection with which “The Peony Pavilion” concludes. Still, if you are patient, this is a tale to look forward to hearing, and rehearing, for a long time to come.